Assets and Liabilities are additional topics Financial topics that require a basic understanding.
Assets are the resources that have economic value owned by any entity. An asset can be tangible and intangible. Tangible assets have physical existence and can be touched whereas intangible assets have no physical existence and cannot be touched.
Assets and Liabilities – The Basics
The Tangible assets category can subdivided into two types.
- Current Assets
- Fixed Assets
1 – Currents Assets
Current assets are those assets which can be converted quickly into cash generally within one year. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.
Accounts receivable is the amount that is owed by a customer to a company against any product and service. Accounts receivable are the legal claim for payment against the service rendered and goods provided to the customer. Accounts receivable are the short term amounts.
Accounts receivable are then further subdivided into two categories.
Trade receivables – Receivables from standard business partners like a customer.
Non-trade receivables – Non-trade receivables are all other debtors, such as amounts due from employees that were given advances or short term loans.
Inventory is the raw material, the material in process or work in process and finished goods available for sale. Inventory can be manufactured products or purchased goods for resale purpose.
Marketable securities are liquid securities and can easily convert into cash. These are financial instruments having the maturity of less than one year. Such as government bonds.
Prepaid expenses are future expenses paid in advance and also shown on the balance sheet.
2 – Fixed Assets
Fixed assets are tangible assets. Fixed assets are purchased for long-term and cannot easily be converted into cash for example building, machinery, and land. Fixed assets are also known as non-current assets.
As mentioned, earlier intangible assets are not physical in nature. Intangible assets include patents, trademarks, copyrights, business methodologies, goodwill and brand recognition.
In the Assets and Liabilities equation Liability is a legal obligation, legal debt or a business responsibility towards its debt. Liability includes short-term liability and long-term liability.
Short Term Liability
Short-term liabilities are also referred as current liabilities these are incurred by the organization that is due in one year. Examples of short-term liabilities are accounts payable, taxes payable, unearned revenues, current purchases, vendor invoices, accrued expenses payable and current portions of long-term debt.
Money owed by a company to its creditors. Accounts payable is a liability to a creditor usually for purchases of goods and services. When a company orders goods or purchase products and does not pay we say the company is buying goods on account or credit. The provider, the vendor or the buyer is called the creditor.
Long term liability is a non-current liability that is not due within one year. Long term liabilities include bonds payable, long-term loans, capital leases, pension liabilities, postretirement health care liabilities, deferred compensation, deferred revenues, deferred income taxes, derivative liabilities,
Types of long-term liabilities
The following Long-term liabilities are found on a company’s balance sheet:
These include notes payable (debt issued to a single investor), Bonds payable (debt issued to general public or investors’ group), and convertible bonds (debt with provision for bondholders to redeem their bonds for common shares, or bonds issued in combination with warrants to purchase stock.)
Owner’s equity is also the part of the long-term financial liability. Owner’s equity represents the owner’s investment in the business, the owner’s drawing or withdrawals (amount for personal use) from the business and the net income since the business began. Drawings are subtracted from investment, and net profit is added. Mathematically, the amount of owner’s equity is a number of assets minus some liabilities. Shares Common stock and preferred stock are the stockholder equity.
Operating Liabilities include capital lease obligations (contract to pay rent for the use of plant, equipment, or property and involving the company to bear a risk as if it owned an asset). Additionally, postretirement benefit obligations (retirement benefits payable under pension plan), and other expenses incurred (including deferred income tax or contingent obligations, like lawsuits that have not yet been settled) – Assets and Liabilities